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Funding and Liquidity

Effective liquidity management is a critical control function at broker-dealers and across firms in the financial sector. Failure to manage liquidity has contributed to both individual firm failures and, when widespread, systemic crises.

In adverse circumstances, whether the result of firm-specific events or systemic credit events, the cost of funding a broker-dealer’s operations could become prohibitively expensive; in extreme cases funding could become unavailable. FINRA expects broker-dealers to develop and maintain robust funding and liquidity risk management practices to prepare for adverse circumstances. Further, FINRA expects broker-dealers affiliated with holding companies to undertake these efforts at the broker-dealer level, in addition to their planning at the holding-company level.

FINRA reviews the funding and liquidity practices of member firms. Among other things, we assess:

  • firm management's knowledge and understanding of the liquidity risks that their firm faces;
  • the firm's ability to measure liquidity needs in high stress situations;
  • management's preparedness and plans for addressing such a scenario should it arise; and
  • the specific steps the firm would take to address its needs.

FINRA recommends that firms rigorously evaluate their liquidity needs related to both market-wide and idiosyncratic stresses, that they develop contingency plans so that they have sufficient liquidity to weather those stresses, and that they conduct stress tests and other reviews to evaluate the effectiveness of their contingency plans.

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Guidance on Liquidity Risk Management Practices
September 15, 2015
Funding and Liquidity Risk Management Practices
November 1, 2010
SEC, NASD Regulation, and NYSE Issue Joint Statement on Broker/Dealer Risk Management Practices
November 10, 1999
Podcast
The second podcast in a two-part series on funding and liquidity risks includes more ideas to consider when developing related policies and procedures.
November 22, 2010
Podcast
Part one in a two-part series on funding and liquidity risks describes why they are of particular concern and basic policies and procedures to address them.
November 15, 2010